A Quick Refresher Course in Macroeconomics
sumit swami
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Abstract
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This paper discusses the evolution of macroeconomics over the past two decades, paralleling it with the Copernican revolution in astronomy. It highlights a decline in the dominance of traditional models like IS-LM and large-scale econometric models, while emphasizing the importance of firm microeconomic principles in macroeconomic research. Despite substantial advances by new classical and new Keynesian theories, a unified agreement on business cycle theory remains elusive, with future developments in macroeconomic theory anticipated to reshape economists' understanding and discussions.
Key takeaways
- The observation that recent developments have had little impact on applied macroeconomics creates at least the presumption that these developments are of little use to applied macroeconomists.
- The widespread acceptance of the axiom of rational expectations is perhaps the largest single change in macroeconomics in the past two decades, A second category of research attempts to explain macroeconomic phenomena using new classical models.
- As Stanley Fischer (1977) showed, it is entirely possible to construct models with rational expectations in which systematic monetary policy can stabilize the economy, Fischers model, in which sticky wages play a crucial role, produces Keynesian policy prescriptions, despite the presence of rational expectations.
- Dissatisfaction with models emphasizing the stickiness of nominal wages turned the attention of Keynesian macroeconomists in the 1980s away from the labor market and toward the goods market.
- Most fundamentally, almost all macroeconomists agree that basing macroeconomics on firm microeconomic principles should be higher on the research agenda than it has been in the past.
